A probability-based stress test of Federal Reserve assets and income

To support the economic recovery, the Federal Reserve amassed a large portfolio of long-term bonds. We assess the Fed׳s associated interest rate risk—including potential losses to its Treasury and mortgage-backed securities holdings and declines in the Fed׳s remittances to the Treasury. In assessing...

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Bibliographic Details
Published in:	Journal of monetary economics 2015-07, Vol.73, p.26-43
Main Authors:	Christensen, Jens H.E., Lopez, Jose A., Rudebusch, Glenn D.
Format:	Article
Language:	eng
Subjects:	Bank examinations Economic recovery Federal Reserve monetary policy Interest rate risk Interest rates Monetary economics Monetary policy Probability theory Quantitative easing Regulation Remittances Reserve assets Studies Term structure Term structure modeling U.S.A Zero lower bound
Online Access:	Get full text
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Summary:	To support the economic recovery, the Federal Reserve amassed a large portfolio of long-term bonds. We assess the Fed׳s associated interest rate risk—including potential losses to its Treasury and mortgage-backed securities holdings and declines in the Fed׳s remittances to the Treasury. In assessing this interest rate risk, we use probabilities of alternative interest rate scenarios that are obtained from a dynamic term structure model that respects the zero lower bound on yields. The resulting probability-based stress tests indicate that large portfolio losses or a cessation of remittances to the Treasury are unlikely to occur over the next few years. •The Federal Reserve׳s expanded balance sheet has greater interest rate risk.•We assess this risk with a probability-based stress test using a yield curve model.•The model generates probabilities of multi-year alternative interest rate scenarios.•We find a low probability that the Fed׳s securities portfolio will be underwater.•We find a low probability that the Fed׳s remittances to the Treasury will stop.
ISSN:	0304-3932 1873-1295